Matteo Renzi's referendum defeat risks Italy political crisis

Italian PM Matteo Renzi's referendum defeat on Sunday has left Italy facing political and economic uncertainty.

Mr Renzi announced he was stepping down after his constitution reform plan was rejected by voters.

He met President Sergio Mattarella and will offer him his resignation later. Mr Mattarella must decide whether to appoint a new PM or hold elections.

There are concerns the instability may trigger a deeper crisis for Italy's already vulnerable banking sector.

A consortium organising a possible bailout for one leading bank, Banca Monte dei Paschi di Siena, is meeting on Monday to consider whether to pursue the rescue bid.

With most ballots counted, the No vote leads with 60% against 40% for Yes, with a 70% turnout.

Mr Renzi staked his political future on his attempt to change Italy's cumbersome political system. He wanted to strengthen central government and weaken the Senate, the upper house of parliament.

His opponents - including some within his own party - had argued that the reforms would give the prime minister too much power. The electorate agreed.

But the referendum was more than a vote on constitutional reform, it was widely regarded as a chance to reject establishment politics.

It was a resounding victory for the No camp, a medley of populist parties headed by the Five Star Movement, which capitalised on Mr Renzi's declining popularity, years of economic stagnation, and the problems caused by tens of thousands of migrants arriving in Italy from Africa.

EU leaders won't have slept much on Sunday night. Angst about Italy makes an uncomfortable bedfellow and there's plenty for them to worry about. Particularly in Brussels.

Prime Minister Renzi was the only premier left in Europe with a vision for the EU's future. Angela Merkel is too busy crisis-managing while much of France is in thrall to Front National eurosceptics.

But Matteo Renzi is no more. The self-styled reformer with his promise to stabilise politics and kick-start the Italian economy has managed quite the reverse.

Italy wakes up on Monday to the threat of a banking crisis, political turmoil, and a group of anti-establishment populists banging on the doors of government. Eurozone beware and EU be warned. Italy is the euro currency's third largest economy and it's in for a bumpy ride. And there are more unpredictable votes to come in 2017: in France, Germany, the Netherlands and perhaps here in Italy too.

The No vote's victory was even bigger than the last opinion poll in November had predicted.

Five Star says it is getting ready to govern Italy. Its leader Beppe Grillo said an election should be called "within a week".

Another opposition leader Matteo Salvini, of the anti-immigrant Northern League, called the referendum a "victory of the people against the strong powers of three-quarters of the world".

Mr Renzi will hand in his resignation to President Sergio Mattarella after the final cabinet meeting.

The president may ask him to stay on at least until parliament has passed a budget bill due later this month.

In spite of the pressure from the opposition, early elections are thought to be unlikely.

Instead, the president may appoint a caretaker administration led by Mr Renzi's Democratic Party, which would carry on until an election due in the spring of 2018.

Finance Minister Pier Carlo Padoan is the favourite to succeed Mr Renzi as prime minister.

The result is being seen as a blow to the EU, although there is no question of Italy following the UK out of the door.

Both Five Star and the Northern League are opposed to the eurozone but not to membership of the EU itself.

Jeroen Dijsselbloem, who heads the group of 19 eurozone countries, denied any impending crisis.

"It doesn't really change the situation economically in Italy or in the Italian banks. The problems that we have today are the problems that we had yesterday," he said.

Reuters news agency quoted German Finance Minister Wolfgang Schaeuble as saying there was no reason for a euro crisis but that Italy urgently needed a functioning government.

Meanwhile a spokesman for Chancellor Angela Merkel said she "took note with regret" of Mr Renzi's resignation but Germany would offer to work closely with the next Italian government.

But the leader of far-right Front National in France, Marine Le Pen, tweeted: "The Italians have disavowed the EU and Renzi. We must listen to this thirst for freedom of nations."

Markets seemed to have taken Mr Renzi's departure in their stride. Stocks and the euro fell in early trading in Asia but there were no signs of panic, as the possibility of his resignation had already been factored in.

But the referendum result could have longer-term implications.

There have been growing concerns over financial stability in the eurozone's third largest economy.

Italy's economy is 12% smaller than when the financial crisis began in 2008.

The banks remain weak and the country's debt-to-GDP ratio, at 133%, is second only to Greece's.

There is a risk that the failure of a major bank could set off a wider crisis, but repairing the banks becomes more difficult amid political uncertainty.

One of the threatened banks is the world's oldest and Italy's third-largest, Banca Monte dei Paschi di Siena, which has been ordered by the European Central Bank to reduce its holdings of bad debt.

The bank is trying to raise new capital to the tune of €5bn (£4.2bn; $5.3bn), but a consortium which had hoped to organise a rescue plan will meet on Monday morning to review its options.

With Mr Renzi gone, and populist parties on the rise, the question is whether Italy can keep a lid on the problems.